Boring Portfolio

<THE BORING PORTFOLIO>
Acquisition Candidate Washington Post Co.

By Dale Wettlaufer (TMF Ralegh)

ALEXANDRIA, VA (March 29, 1999) -- The 10-Ks keep rolling in this week. I've noticed many companies on the Bore radar slipping in their annual report just under the deadline. I'm still waiting for Berkshire Hathaway (NYSE: BRK.A) unit Wesco Financial (AMEX: WSC) to file its 10-K, but I did notice one of our companies (through Berkshire) did file last week. The Washington Post Co. (NYSE: WPO) filed on the 26th. The following was already known, although the details hadn't been published until now, as far as I know:

"At January 3, 1999, the Company's ownership of 747,100 shares of General Re Corporation ("General Re") common stock and 20 shares of Berkshire Hathaway, Inc. ("Berkshire") Class A common stock account for approximately 72 percent of the total fair value of the Company's investments in marketable equity securities. The investment in General Re and Berkshire common stock was acquired by the Company throughout the third and fourth quarters of 1998 from the open market for a total cost of $164,955,000. The gross unrealized gain on the General Re and Berkshire common stock totaled $19,485,000 at January 3, 1999."

Converting the GenRe shares to "A" class Berkshire shares and adding the "A" class Berkshire shares to those, that's 2,634.85 Berkshire shares. At a total cost indicated above, that's a cost basis of $62,605 per share. Not bad. If we were to think about buying Washington Post, which we are, that's a nice little bonus in there that's not such a sharp stick in the eye.

By the way, some quote services will indicate a P/E on Washington Post as lower than it actually is. The company took a gain on the sales of businesses, which is indicated as a $314.4 million credit to the income statement (viewed via the cash flow statement). Washing that out of net income, we have net income of $221.9 million. Adding back $49.9 million in goodwill amortization, we get adjusted net income of $271.8 million. At today's closing quote of $526, that's just under 20 times net income. See note 1 of the attached file (5K: Rich Text Format) for more detail on the gain taken this year and last year.

The way we look at things, net income for common increased 78 basis points year-over-year, rather than the 6% decline in net income described in the 10-K because we don't pay too much attention to amortization of goodwill unless that goodwill has to be replaced every year, which is something we've never encountered. On a basic sharecount level, then, EPS increased from $25.21 to $26.94, or 6.9% due to share repurchases.

On the top line, newspaper revenues were up about 2.2% in 1998, measuring on a weekly basis to adjust for the effect of a longer fiscal year for the newspaper segment in 1998. Part of the reason newspaper margins were down this year came from expansion of printing plants, though I don't think circulation or advertising rates and lineage were helped by this, since the color presses only started to roll within this fiscal year. PP&E depreciation was up 25% year-over-year following a 9.8% increase in 1997, so we're perhaps looking at a bit of a revenue and expenses mismatch that will benefit fiscal 1999. One disturbing trend was a 3% decline in retail advertising revenues, which was the result of a 7 1/2% decline in inches of advertising. General advertising and preprint (inserts) revenues increased 11%, due to a 6% increase in preprint advertising.

Television broadcasting (note 2 in attachment) showed a 6% increase in revenues, to $357.6 million and operating margin before amortization of goodwill and other intangibles (likely to be broadcast licenses) was 52%. The magazine division was weaker for the year due to fewer special editions and weaker international revenues while cable showed excellent top-line growth of 16% due to acquisitions and price increases.

Growth in other revenues was excellent this year. From the 10-K:

"In 1998, revenues from other businesses, including Kaplan Educational Centers, Washingtonpost.Newsweek Interactive, MLJ (sold in July 1998), Legi-Slate and PASS Sports (nine months of 1997), increased 32 percent to $208.4 million, from $157.4 million in 1997. The majority of the increase is attributable to continued growth at Kaplan Educational Centers. Kaplan's revenues increased 66 percent in 1998 (with acquisitions accounting for approximately two-thirds of the increase)."

I'm personally very excited about this division, as I discussed a few weeks ago here in the Bore port column. I believe the tens of billions of dollars in capital being spent on broadband infrastructure in this country will be of great benefit to Washington Post's education division, and I think the institutional knowledge and experience of the company's education divisions are significant intangible assets that will really blossom a few years down the line. At the current earnings yield of around 5%, Washington Post Co. is very much a candidate for acquisition for us.

Speaking of companies on the radar, Fortune published a cover story on NASCAR last week. International Speedway Corp. (Nasdaq: ISCA), owner of the Daytona Speedway, Talladega, Darlington, and other great NASCAR-related assets is one of our favorite sports/entertainment companies around. I haven't read the article yet, but I thought I'd call your attention to it, and I would expect it to be a help in understanding why we like this company so much. Click here for that article.

Portfolio Management Update

Finally, on an up market day like today, let me take the opportunity to remind those who expect us to make quick decisions based on how we perform over six months that this is just not a statistically important period of time for us to assess performance. One of the reasons why mutual funds underperform is because investors overall are impatient and unsure of their capital allocation decisions. As value investors, we frequently enter into situations that are not popular or sure things. The surety we want comes from how much we know about the business and how confident we are in the company and the price at which we are purchasing relative to intrinsic value.

It's nice to see something go up right away, and it's nice to outperform the market indexes every week and year, but we don't require that to be sure of what we are doing. If we can beat the market on a rolling three-year basis, which is directly ripped off from Berkshire Hathaway but makes total sense to us, then we're more than happy. That's not to say that we're unhappy with our performance here. The Boring portfolio is up 25.3% since Alex and I took it over on October 1, 1998 versus a 33.7% advance in the S&P 500. I'm more than satisfied with our capital allocation decisions and performance since taking over the portfolio, though we wouldn't mind being ahead of the index instead of being behind by 870 basis points. But that's how things go. We have a healthy slug of cash we'll deploy when we find a company we would really like acquire. In the meantime, we don't feel any pressure to do anything differently as we approach the six-month anniversary of taking over the Bore port this Thursday.

Would you work for a bunch of Fools?

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03/29/99 Close
Stock  Change    Bid
BRKb  +26      2426.00
CSL   +2 7/8   44.06
CSCO  +4 13/16 110.00
GTW   +2 13/16 68.44
                   Day    Month   Year  History
        BORING   +3.29%   5.03%   0.50%  34.95%
        S&P:     +2.13%   5.80%   6.90% 118.12%
        NASDAQ:  +3.05%   8.95%  13.69% 139.48%

    Rec'd   #  Security     In At       Now    Change
  6/26/96  225 Cisco Syst    23.96    110.00   359.18%
  8/13/96  200 Carlisle C    26.32     44.06    67.38%
 12/31/98    8 Berkshire   2244.00   2426.00     8.11%
   2/9/99  100 Gateway 20    72.38     68.44    -5.44%


    Rec'd   #  Security     In At     Value    Change
  6/26/96  225 Cisco Syst  5389.99  24750.00 $19360.01
  8/13/96  200 Carlisle C  5264.99   8812.50  $3547.51
 12/31/98    8 Berkshire  17952.00  19408.00  $1456.00
   2/9/99  100 Gateway 20  7237.50   6843.75  -$393.75


                             CASH   $7658.52
                            TOTAL  $67472.77

</THE BORING PORTFOLIO>